Fernandez Mimics Chavez as YPF Move May Isolate Argentina

In yesterday’s speech, President Cristina Fernandez de Kirchner said that state control of YPF was in the interest of both the country and consumers. Photographer: Daniel Garcia/AFP/Getty Images

April 17 (Bloomberg) -- Argentine President Cristina
Fernandez de Kirchner is taking a page from Hugo Chavez’s
playbook by seizing control of oil producer YPF SA and blaming
foreign companies for the country’s energy shortages.

Fernandez, 59, shut out of global credit markets following
her country’s 2001 debt default and facing slowing growth at a
time of 23 percent inflation, turned to tactics used by
Venezuela’s socialist leader when she ordered yesterday the
expropriation of 51 percent of the nation’s biggest oil producer
owned by Spain’s Repsol YPF SA.

The move follows Fernandez’s 2008 seizure of $24 billion in
private pension funds and her tapping of central bank reserves
to make debt payments. Investors already distrustful of
Fernandez’s policies will see in this latest grab the start of a
Chavez-like drive to expand the state’s control of the economy,
further isolating Argentina, said Claudio Loser, a former
International Monetary Fund official.

“It’s another sign that Argentina is moving away from the
international economic community,” Loser, who oversaw Latin
America at the IMF from 1994 to 2002, said in a telephone
interview from Miami. “If Argentina already had trouble to get
financing, this is going to make it even harder and hurt foreign
investments.”

Imports Doubled

Fernandez is pressuring energy companies to boost output
after fuel imports doubled to $9.4 billion in 2011 from a year
earlier, helping the country’s trade surplus narrow to a one-year low of $280 million in December.

Since Fernandez’s landslide re-election in October, her
country’s borrowing costs have overtaken those of Venezuela to
become the highest in the region. Yesterday, yields on
Argentina’s dollar debt rose 26 basis points to 11.93 while
Venezuela’s fell six basis points to 11.84 percent, according to
JPMorgan Chase & Co. indexes. In October, Venezuela’s bonds
yielded 354 basis points more than Argentina’s.

Similarities with Chavez’s policies have increased since
Fernandez’s re-election, when she tightened controls over the
exchange market in a bid to slow record capital outflows. She
also boosted import restrictions to protect local industry and
changed the central bank charter to increase the amount of
reserves the government can use to fund spending.

Socialism Drive

Chavez, 57, deepened his drive to install socialism in
Venezuela after his re-election in 2006 by nationalizing oil,
steel, cement and banking assets while tightening currency
controls he introduced in 2003. Chavez also used reserves for
spending and has jailed brokers to fight capital flight.

“Right up until the elections, Argentina went to great
lengths to distance itself from the Chavista economic model but
since then all the moves have been in that direction,” said
Boris Segura, Latin America strategist at Nomura Securities.
“The business environment is becoming more challenging for the
private sector. In that sense, there is convergence in terms of
economic policy.”

Argentina’s regulated gas and electricity tariffs and
subsidies for domestic users have reduced investment and
production incentives, contributing to a rise in oil and gas
imports that has turned an energy trade surplus into a deficit.
With the YPF nationalization, the government aims to reverse the
downward trend in oil and gas production.

European Commission President Jose Barroso said he is
“seriously disappointed” by Argentina’s decision to seize YPF.

Repsol Response

Repsol Chief Executive Officer Antonio Brufau said today
that Argentina aimed to take over YPF cheaply and that the
company demands compensation.

“The expropriation isn’t anything more than a way to cover
up the social and economic crisis Argentina is suffering at the
moment,” Brufau told journalists in Madrid.

The decision on YPF “adds to Argentina’s policy
uncertainty and could prove to be harmful for long-term private
investment,” according to Fitch Ratings. “This action also
underscores the unfavorable business environment, as
characterized by increased government intervention and
regulatory uncertainty in the country.”

In the first half of 2011, foreign direct investment in
Argentina dropped 30 percent from a year earlier, the biggest
decline among the region’s major economies, according to the
United Nations’ Economic Commission for Latin America and the
Caribbean. Through June 2011, Argentina received $2.4 billion in
foreign investment, compared with Brazil’s $44.1 billion,
Mexico’s $10.6 billion and Colombia’s $7 billion.

Maduro, reading a statement on state television yesterday,
said Venezuela supports state control of natural resources,
especially energy, and rejects “European” threats to
Argentina.

Fernandez yesterday also replaced Chief Executive Officer
Sebastian Eskenazi with Planning Minister Julio De Vido and
plans to send a bill to take the majority stake in YPF to
Argentina’s Congress where it’s likely to receive swift approval
by Peronist party lawmakers, joined by some of the opposition.

“Argentina is getting closer to a sovereign management of
its strategic resources, as it was with the case of the pension
funds,” said Carlos Heller, a lawmaker whose party is allied
with the ruling Victory Front coalition, in a phone interview.
“The only country in Latin America that didn’t have a state
management of the oil sector was Argentina. So we are now in
line with the rest of the region.”

State Assets

In 1993, President Carlos Menem sold most of Argentina’s
largest oil company to private investors as part of his drive to
sell state assets. In 1999, Repsol SA, then Spain’s largest oil
company, acquired control of YPF SA.

Fernandez’s late husband and predecessor Nestor Kirchner,
at the time governor of the oil-producing province of Santa
Cruz, supported the 1993 sale.

Heller said he expects the bill will pass.

“We want a company that is committed to a model of a
sustainable country that has growth and development,” Fernandez
said yesterday.

Still, differences between the Argentine and Venezuelan
economies mean Fernandez wouldn’t be able to expand her
government’s role as much as Chavez has in Venezuela, where 90
percent of exports are oil and energy, said Igor Arsenin, head
of Latin America strategy at Credit Suisse Group AG in New York.

Agricultural Economy

“Argentina is a much more diversified economy,” Arsenin
said. “Much of their foreign exchange revenues are coming from
the agricultural sector and clearly you can’t nationalize
that.”

In Venezuela, “they’re able to run the state based on
purely oil revenues and let the rest of the economy stagnate,”
Arsenin said.

Due to nationalizations, Venezuela faces more than 15
pending arbitration cases in the World Bank’s International
Centre for Settlement of Disputes.

Both countries are struggling to slow the fastest inflation
rates in the region.

Venezuela reported that consumer prices rose 24.2 percent
in March from a year earlier, while Argentina’s prices rose 23.2
percent, according to the average estimate by economists
reported by opposition lawmakers on April 12.

Prices, Growth

Argentine private researchers have released their own
inflation reports since early 2007, when Fernandez’s husband and
predecessor, Nestor Kirchner, made personnel changes at the
statistics agency. According to the agency, consumer prices rose
9.8 percent in March from a year earlier.

Argentina’s economic growth, among the fastest in Latin
America for the past decade, will slow to 3 percent from 8.9
percent in 2011, according to the median estimate of seven
economists surveyed by Bloomberg.

Venezuela’s economy will grow 4.0 percent in 2012,
according to the median estimate of five economists.

While the accuracy of Venezuela’s official statistics
hasn’t been questioned, Chavez has used his powers to limit free
speech and the flow of information and also undermine the
country’s democratic institutions.

As well as imprisoning and barring political opponents from
running for office, the former tank commander’s control of the
judicial system has allowed him to bypass Congress and rule by
decree.

In yesterday’s speech, Fernandez said that state control of
YPF was in the interest of both the country and consumers. At
the same time, she urged leaders of the country’s other
industries to avoid raising prices and instead increase
production to meet higher demand.

“We need you to understand the need of commitment to the
country,” said Fernandez. “I’m going to continue to protect
local industry and our consumers.”